By Aaron Clark and Barbara Powell July 20 (Bloomberg) -- Refiners from Germany to Hawaii are weighing plans to shut or sell plants amid the biggest drop in oil demand in almost three decades. Petroplus Holdings AG told workers in Teesside, northern England, their jobs are at risk. Royal Dutch Shell Plc may sell or close two plants in Germany and another in Montreal. Total SA will dismantle 25 percent of France’s biggest refinery. Chevron Corp. is reviewing its Hawaii plant. Within five years, about 25 percent of capacity in North America and 30 percent of Europe’s will be idled, the International Energy Agency says. Traders are buying contracts that appreciate as the so- called crack spread that reflects the return from breaking crude into gasoline, diesel and heating oil increases. Margins representing profits from making fuel will rise to $10.71 a barrel in July 2012 from $8.97 on July 17, futures prices show. Survival “is all about how competitive your refinery is,” said Jacques Rousseau, an energy analyst for Soleil Securities Corp. in Vienna, Virginia. “The initial response has been to ratchet back production but the longer you go breaking even or losing money, you have to start considering closures.” Refiners such as Valero Energy Corp. and integrated oil companies including Shell may shut or sell unprofitable plants because fuel demand dropped during the first global recession since World War II. One out of six in the U.S. probably will close by 2020 if U.S. carbon-reduction legislation passes and new, more efficient plants come online in India and China, according to the American Petroleum Institute, a Washington- based group. Stockpiles Grow U.S. companies are operating below the five-year average of 88.3 percent of capacity as fuel stockpiles swell. U.S. plants ran at 87.8 percent in the week ended July 10, and inventories of distillates were the highest in 24 years, Energy Department data show. “The industry is going to have to go back to running at 80 percent or lower,” said Ann Kohler, a New York-based analyst with Caris & Co. Global margins dropped to $4.98 a barrel in the second quarter compared with $8.25 a year earlier, according to BP Plc data. In the U.S., the profit from turning three barrels of crude into two of gasoline and one of distillate reached $23.95 on May 17, 2007, a record going back to at least 2000, when crude was at $64.86 a barrel, data compiled by Bloomberg show. When crude reached a record $147.27 a barrel on July 11, 2008, the crack spread had fallen to $11.762, the data show. Record Profits Valero, the largest U.S. refiner, had record second-quarter profits of $2.25 billion in 2007 when the industry’s spread averaged $20.20 a barrel. Net income was down to $1.15 billion in the third quarter of 2008 when futures showed the margin averaged $13.11, according to data compiled by Bloomberg. With the gap now lower, Shell, Europe’s biggest oil company, may shut, sell or convert plants that account for 8.8 percent of its global capacity, or 349,530 barrels a day. The Hague-based company is reviewing the Montreal, Canada, plant, its Hamburg- Harburg and Heide sites in Germany and a 17 percent stake in New Zealand Refining Co., Rainer Winzenried, a spokesman, said in a telephone interview. Petroplus, based in Zug, Switzerland, said Feb. 5 it would sell the 117,000 barrel-a-day U.K. Teesside refinery or turn it into a terminal for shipment and storage by the end of the year. Total will reduce output at Gonfreville in Normandy by 25 percent to 12 million tons a year, and shut a fluid catalytic cracker, lowering gasoline output by 60 percent. Chevron Plant Chevron, the second-largest fuel producer in the U.S. West, in considering shutting in Hawaii and converting into a terminal. More stringent fuel specifications and growth in global capacity are forcing the company to study its options, said Al Chee, a spokesman. “I don’t think there is going to be one ‘aha moment’ where you are going to have all of this consolidation occur,” said Kohler at Caris. “It’s more a gradual ebbing.” Flying J Inc. halted production at its 68,000 barrel-a-day Bakersfield, California, unit after filing for bankruptcy in December. The Ogden, Utah, company may close the plant, purchased in 2005 from Shell, which had planned to shutter it. In addition to closures, companies may announce plans to temporarily idle units or entire plants for maintenance when the intent is to close them. “It won’t be well advertised, you will have very quiet shutdowns, some will say for ‘maintenance,’ which nobody in the industry will believe,” said James Cordier, the founder of OptionSellers.com, part of Liberty Trading Group in Tampa, Florida. Aruba Refinery Idle Valero said that it plans to keep its Aruba refinery closed for months, starting July 16, because of falling margins. The San Antonio-based company will assess economic conditions in two to three months and then decide whether to restart at the 275,000 barrel-a-day plant, according to Bill Day, a spokesman. The increase in profit margins foreseen in futures prices may not occur if newer plants in India, China, Brazil, Russia and the Middle East come online before older ones in Europe and the U.S. are closed. Global capacity will increase by 7.6 million barrels a day between 2008 and 2014, with 54 percent of the new capability in Asia, the IEA said June 29. Demand for oil is projected to rise by 3.2 million barrels a day, the Paris-based organization said. While global production can expand, U.S. demand will grow at a slower pace, the Energy Department said in its Annual Energy Outlook in March. U.S. consumption peaked in 2007 at 20.65 million barrels a day and will have recovered to 20.05 million barrels by 2020, according to the report. U.S. product demand “could decline quite significantly over the next 20 years,” said Kohler. Ethanol Blends Demand for refined products may be reduced by increased blending of ethanol with gasoline and government rules to boost fuel efficiency in cars. Ethanol accounted for about 7.2 percent of a gallon of U.S. gasoline this year and will reach 14 percent by 2020, under federal standards. Automakers will be required to increase average mileage by 9.3 percent to 27.3 miles per gallon between 2010 and 2011, the U.S. Department of Transportation said in March. The administration of President Barack Obama plans to increase the mandate to 35.5 miles per gallon by 2016. U.S. legislation aimed at reducing carbon emissions may lead to additional closures as companies are forced to pay for a permit for each ton of carbon dioxide they emit. The bill passed in the House of Representatives would force the shutdown of about 2 million barrels of daily U.S. capacity, according to Roger Ihne of Deloitte Consulting LLP in Houston. That’s equivalent to 12 percent of the nation’s fuel-making capabilities. Lost Jobs “There’s no question it will result in lost jobs, higher costs and a loss of refining capacity in this country,” said Valero spokesman Day. “It will make it too costly for marginal refiners to operate in the U.S. and compete with new refineries being built in Asia.” Lion Oil Co.’s vice president, Steve Cousins, told a congressional subcommittee on June 9 that the company would have to spend $180 million a year on carbon permits compared with average annual profit of $13 million, forcing it to shut a plant in El Dorado, Arkansas, that processes l70,000 barrels day. The last round of shutdowns followed the oil price shocks of the 1970s and an earlier set of rules to reduce emissions. The number of U.S. refineries dropped to 149 in 2000 from 319 in 1980, Ihne said in a July 9 report. “More refinery closures are likely now than in prior cycles since independent refiners would be less likely to ‘carry’ an unprofitable refinery on their books, versus an integrated oil company with a stronger balance sheet,” said Rousseau in a June 30 note to investors. To contact the reporters on this story: Aaron Clark in New York at aclark27@bloomberg.net; Barbara Powell in Dallas at Bpowell4@bloomberg.net

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